Avidbank Holdings (NASDAQ: AVBH) reported adjusted net income of $8.2 million ($0.76 per share) for the second quarter of 2026, reflecting robust core profitability despite a $2.6 million litigation settlement charge.

The bank achieved significant balance sheet expansion, with loans growing by $51 million and deposits increasing by $123 million during the quarter. Management highlighted strong pipelines in commercial and industrial (C&I) lending, alongside the launch of a new SBA Lending Division to capture government-guaranteed financing opportunities.

Financial Performance

Net interest income rose slightly to $26.7 million, up $181,000 from the first quarter, supported by higher average earning assets. However, this growth was partially offset by increased deposit costs and lower Federal Home Loan Bank (FHLB) dividends.

The net interest margin (NIM) contracted by 12 basis points to 4.26% from 4.38% in Q1. The cost of interest-bearing deposits increased by 8 basis points to 3.06%, reflecting pricing pressure that moderated toward the end of the quarter as the spot rate settled at 3.07% on June 30.

Non-interest income totaled $3.1 million, largely driven by $1.3 million in bank-owned life insurance (BOLI) death benefit proceeds. Excluding these proceeds, core non-interest income grew to $1.7 million from $1.5 million in the prior quarter.

Credit Quality and Provisions

Asset quality showed mixed signals. Non-performing loans (NPLs) declined to 0.65% of total loans from 0.75% at the end of Q1. However, the provision for credit losses nearly doubled to $2.8 million from $1.4 million, primarily due to a $1.9 million partial charge-off on a single construction loan.

Criticized loans increased, driven by a non-owner-occupied real estate relationship involving three loans totaling $21 million with low loan-to-value (LTV) ratios. Management stated these credits are being actively managed and are well-collateralized.

Operational Efficiency

Core non-interest expense decreased to $13.8 million from $14.1 million in Q1, excluding the $2.7 million litigation settlement. This reduction was attributed to lower credit-related legal and professional fees. Salary and benefits remained flat at $9.6 million.

The adjusted efficiency ratio improved significantly to 48.7% compared to 15.4% in the first quarter, aided by revenue growth and expense discipline. Book value per share rose by $0.64 to $26.97.

What the Numbers Show

The divergence between loan growth and deposit growth highlights a shift in funding strategy. While loans grew by $51 million (9% annualized), deposits surged by $123 million (22% annualized). This imbalance suggests the bank is prioritizing deposit accumulation to reduce reliance on brokered funding, which management noted is maturing and running off. The resulting increase in cash and investment portfolio assets likely contributed to the NIM compression, as these assets yield less than the loan book.

Outlook and Strategy

Management targets low double-digit growth in both loans and deposits for the remainder of the year. The bank added eight full-time employees in Q2, including five senior bankers, to support this expansion. CEO Mark Mordell indicated that market disruptions in the regional banking sector present opportunities to attract talent and clients.

Looking ahead, CFO Pat noted that NIM could trend further down if deposit growth continues, potentially reaching 4.20%, but emphasized that total interest income should rise. Loan yields are expected to remain stable, supported by prime-plus pricing in C&I and rising rates in commercial real estate.

Avidbank Holdings, Inc. (NASDAQ: AVBH) announced the closing of a $30 million private placement of fixed-to-floating rate subordinated notes. The company plans to use net proceeds to repurchase its outstanding $22 million callable subordinated notes and for general corporate purposes.

The transaction was executed through Piper Sandler & Co., which served as sole placement agent. Manatt, Phelps & Phillips, LLP advised Avidbank, while Davis Polk Wardwell, LLP advised Piper Sandler.

Deal Structure

The notes carry a maturity date of September 1, 2036. They feature a fixed interest rate of 7.00% for the first five years. Thereafter, the rate converts to a floating structure, resetting quarterly at three-month Secured Overnight Financing Rate (SOFR) plus 291 basis points.

The company may redeem the notes, in whole or in part, without penalty on September 1, 2031, or any subsequent interest payment date. Early redemption is permitted upon certain specified events.

Capital Implications

The notes are intended to qualify as Tier 2 capital for regulatory purposes. This issuance allows Avidbank to manage its liability profile by replacing existing callable debt with longer-term instruments.

The indebtedness is not a deposit and is not insured by the Federal Deposit Insurance Corporation or any other government agency. The notes have not been registered under the Securities Act of 1933.